IMO gold can move due to general commodity price inflation (as was seen from 2000 to 2011) or due to flight to safety in a crisis, particularly a crisis in confidence in government money. Out of control price inflation is one form of such crisis. A big war would be another. Another financial system crisis would be another.
Currently:
- I don’t see it breaking down very far at least not for any length of time.
There is a strong argument that there could be a big debt crunch / deflation, stocks drop, bonds fall, commodity prices fall farther, a financial system crisis etc. People like Harry Dent see gold in this context and argue gold should fall with everything else in this case, down to $800 yet. But that is a commodity price argument. And it does not sufficiently take into consideration the flight to non-govt. money in that scenario, imo. Gold may fall but less, or stay even, or even rise if something drastic happens, like a major European banking crisis that spreads to the U.S. etc.
- Commodity price inflation - gold continues up at a similar pace
Gold has roughly followed the $CRB index since the 2011 breakdown in commodities. In 2016 it caught a flight to safety bid and is up 20%. This change of direction started in January. Other commodities did not follow.
If governments go on an infrastructure build-out binge and cause commodity prices to surge this will lead to some inflation. If oil would happens to start following this new movement in metals, then I would say watch out for inflation getting serious. I would watch the U.S. $1T infrastructure bill (when it arrives) closely and whether other countries follow. But even just the U.S. and China moving in this direction could be enough. Oil would start to play catch up later.
Copper is up almost 20% in a few weeks. You can see how quickly this can start something that is hard to control. The U.S. could be seeking ‘jobs’ and end up stoking the flames of inflation much more than intended. This is especially the case because commodities (the $CRB) is only at 40% of what it was in 2011. This means a bounce up 50% is not too hard to create. And that represents a 50% price increase (inflation) in basic cost inputs to much of the economy. Again, watch oil later in 2017.
If this occurs, gold would catch the commodity price bid as well as the flight to safety bid. It could be a nice steady upward climb as in 2001 to 2011. But then you have to watch what happens after this infrastructure spending thing is over. IMO even if the infrastructure maintenance is needed (and it could well be), the carry through into permanent jobs will be limited, and if there is a let down there will be a call for another $1T and so on. It will be a hard cycle to break.
- In the longer term, the dollar is slowly being replaced esp. in Asia first as the primary trading currency and then ultimately the reserve currency. This is intended to be a slow 20 year process not a sudden over night crisis event just like when the British currency was slowly replaced by the dollar after WW1. And in this case it is actually more of a diversification than a replacement. In the long term this means a devaluation of the dollar (inflation) and a rising price of gold in dollars. But this is intended to be a slow process and could be interrupted by sudden short term events in either direction. Ultimately this will have some good results for the U.S. - more competitiveness, probably more manufacturing jobs coming back to the U.S. etc. But out of control inflation or a war could alter the timeline drastically and make gold respond positively more quickly. Or a sudden debt / banking crisis emerging from somewhere seems quite possible and could upset the well made plans of mice and men. This is where the “crisis” ideas of someone like Jim Rickards comes in who predicts an event will happen that leads to a revaluation of gold in dollars (a devaluation of the dollar) in order to stabilize the global financial system.
Ultimately there are many forces at play and any specific short term predictions are just guesses imo. But in the longer term it definitely looks like $1270 gold is a pretty good get.
